By Olesya Dmitracova
LONDON, Feb 4 (Reuters) - Britain may be raging at bankers' pay, but the bonus round provides a welcome contribution to stretched public finances.
That is the dilemma facing lawmakers as they seek to clamp down on pay at Britain's banks and at international banks based in London, home to hundreds of the world's top bankers.
Politicians are backed by public anger that bankers could rake in some 7 billion pounds in bonuses for last year, not long after taxpayers were called on to bail out the industry.
But for every 1 million pound ($1.6 million) bonus paid by a bank, Britain's Treasury gets about 322,000 pounds more in taxes than if the bank kept that sum as profit and paid corporation tax on it, said Bill Dodwell, tax partner at Deloitte.
"It is true, no question, that the greater the compensation spend the more tax the government receives," agreed Jon Terry, PwC's top adviser on remuneration in financial firms.
PwC estimated that for the tax year to March 2010, the financial sector paid 53.5 billion pounds in taxes, or 11 percent of Britain's total tax take. Employment taxes paid by banks and their staff accounted for 18.7 billion pounds.
Britain is grappling with a record budget deficit -- it is forecast to hit 148.5 billion pounds in the year to March 2011 or 10 percent of national output -- and has announced a raft of austerity measures aimed at eliminating it by 2015. Lucrative payouts for bankers have stoked resentment among Britons facing pay freezes or below-inflation pay rises, and public spending cuts.
Because there are a series of different levies on bankers' pay it brings in a higher rate of tax than the rate at which banks' profits are taxed.
So when banks pay out a huge proportion of their earnings in salaries and bonuses they make a larger share of their revenue subject to the higher rate of tax than if they kept it.
"I entirely understand the (public's) emotional response," Terry said, but added that making a subjective decision on what constitutes a "reasonable" amount of pay was the wrong approach.
Moves to defer more pay and award more in shares were more important, coupled with an increased focus on preventing pay from putting a bank's capital base at risk, he said.
CAPITAL FIRST, PAY LATER
The banks may be bringing in considerable tax revenues via their bonus payouts, but it is precisely the size of those payouts that has in the past threatened their capital base and brought them to the government asking for help.
The Bank of England has estimated that if UK bank bonuses had been 20 percent less between 2000 and 2008, banks would have built up 75 billion pounds of additional capital -- more than the bailout taxpayers provided during the crisis.
The government was forced to take stakes worth 67 billion pounds in Royal Bank of Scotland and Lloyds Banking Group to keep them afloat.
Big bonuses have particularly maddened Business Secretary Vince Cable, one of the most outspoken critics of the banks.
"Because the banks are too big to fail, they therefore enjoy an implicit subsidy, and it is explicit in the case of a state-owned bank, and that is used to pay higher pay than would otherwise be the case," he told Reuters.
"And that is why it is a problem."
The opposition Labour Party has called for the reimposition of the one-off bonus tax they used when in power to raise about 3.5 billion pounds.
But the government says this would trigger tax avoidance and has instead introduced a levy on bank balance sheets that will raise 2.5 billion pounds a year when fully in place.
Given that many analysts say Britain is fighting a losing battle over the size of bonuses, finding an alternative levy may provide an opportunity to further bolster the taxman's coffers. (Additional reporting by Tim Castle; editing by Sophie Walker)